Lenders taking fewer risks during credit squeeze

The Bank of England said the credit squeeze on consumers and businesses is set to intensify over the next quarter.

Banks and building societies have informed the Bank of England that they will tighten lending criteria even more severely in the second quarter of the year than they did in the first quarter.

According to lenders, the uncertainty surrounding the economy and the credit squeeze is driving them to take fewer risks.

Earlier this week, a spokesperson for the Bank of England warned that a cut in the interest rate next week was far from certain.

According to analysts, the last two rate cuts in December and February have failed to filter through to benefit either households or companies.

The Bank of England said that lenders expect to cut back on unsecured lending, which covers both credit cards and overdrafts, in the next few months. A growing amount of borrowers had failed to keep up repayments on their loans and mortgages in the first quarter of 2008 than in the last quarter of 2007, according to the Bank of England.

It expects the losses that come from such defaults including repossessions to increase further.

The news follows announcements that lenders are scrapping cheap mortgage offers. Internet bank, first direct, announced earlier this week that it has temporarily withdrawn all its mortgage products as it tries to clear a backlog of customer applications.

Alliance & Leicester and Scottish Widows have both curtailed their product ranges and Northern Rock recently set its new mortgage rates at uncompetitive levels, in a conscious effort to drive away new business.

Furthermore, the Co-operative Bank has withdrawn its two-year mortgage deals while Lehman Brothers, the US investment bank, is also withdrawing from the UK mortgage market. The Halifax warned that its mortgage costs are set to increase.

Discuss this in the Finance Markets forums

Story link: Lenders taking fewer risks during credit squeeze